Words on Family Law Strategies for Generational Wealth

Hello and welcome to the Words on Wealth podcast. I’m Lucy Meagher, Senior Investment Advisor at Evans & Partners and I’ll be your host today. So today I’m joined in the studio by two wonderful guests, we’re very lucky to have them, to help us unpack what can often be complex, the world of family law. So when I think of family law, my mind often goes straight to divorce, but what I’m learning and what we’ll discuss today is that family law really touches many of life’s biggest moments. So yes, it can be those early stages of relationships, whether our own or potentially our children’s, right through to separation and also estate planning. So today, we really want to explore some practical advice to help navigate what can inevitably be sensitive conversations around family law matters and support the careful management of wealth across generations. So I’m thrilled to welcome today with me, we have family law specialist, Skye Owen, and Skye’s a lawyer at Lander and Rogers. And we also have Jacqueline Wharton. Jacqueline is a former family lawyer and now divorce coach who founded Separation and Divorce Advisors with the aim of supporting individuals and families through separation. So Jacqueline, to start us off, can you explain the difference between a family lawyer and a separation and divorce advisor?

Yeah, great question. I am no longer a lawyer so I’m not able to give legal advice. What I do do is try and provide my clients with a little bit of a framework as to how the family law system works, but with an overlay of negotiation advice and emotional support. When people come and see us, Skye or myself, they’re often, as you can imagine, in crisis. So they often need a little bit of further help, a helping hand to really understand what’s going on and for them to understand ⁓ how the family law system works. in terms of what is divorce, everyone comes and wants to talk about divorce, but actually divorce in Australia is just a piece of paper saying you’re not married anymore, it’s not the financial settlement or child support or parenting arrangements. it’s really, I’m really there to help decipher how things work, to help people get organised so they understand their obligations around financial disclosure to the other side, to help them understand what it is that they want out of their separation or their divorce. I mean just really to give them some extra support. As I said it’s not an easy time for anyone.

I would just say one thing just leading on from what you’ve said. I think the term divorce is a little bit misleading in our area that we work within because we can, divorce actually relates to people that are legally married. Whereas the work that family lawyers do and the work that Jacqueline does covers people that are in relationships and we call them de facto relationships where they’re living together, but they may not necessarily be legally married. So the work that we do covers both legally married couples and also people that are in a relationship living together but not legally married. Divorce relates to the legal separation of those people ⁓ but we can still deal with all the other raft of matters that arise in family law disputes for people that separate after being in a de facto relationship. So I just think that distinction needs to be drawn so people understand.

So, I mean, you mentioned Jacqueline, you know, often when you see clients, it’s a crisis. It’s a crisis for the couple, it can be a crisis for the extended family. But if we dial it right back to the beginning of most relationships. You know, it’s rose-colored glasses, it’s, you know, we’re not thinking about contingencies on this. But Skye, maybe from ⁓ a practicing lawyer perspective, how should our clients think about going into a relationship if they have more assets than the other party, or particularly if they’re seeing their children entering into relationships? Are there things that they should be thinking about in terms of ⁓ you know, those assets.

So I think the best way to protect assets or gifts that are gifted to adult children by parents during ⁓ a relationship or before a relationship is through what’s known as a binding financial agreement, which is also colloquially known as a BFA or ⁓ a prenup. ⁓ I have clients say well… is that really for us? Isn’t that just for celebrities or people that have lots and lots of money or isn’t that an American thing? ⁓ No, that’s not the case. BFAs can be very valuable for anyone who holds assets going into a relationship and in protecting those moving forward. ⁓ So basically in summary very quickly, a BFA in Australia is a private agreement between two people in a relationship that records how they want their property dealt with after they separate. BFAs are not involving the parents of the couple, that’s really important. So if a parent wants to gift money to an adult child, they’re not a party to the binding financial agreement. I think that’s an important distinction to make. BFAs cover everything that you can consider in relation to financial matters and can include things like inheritances, gifts, how property is to be divided, it’s all can be covered under the umbrella of a binding financial agreement. An example we often see is clients who are buying their first home with assistance from one of the parents or even sometimes both of the parents and they’re keen to quarantine that money in some way in the event that they do separate. Similarly, in binding financial agreements, we might want to quarantine an asset and that can be done in a binding financial agreement. So if one party to a relationship is coming into a relationship owning several properties before that they enter that relationship, those properties can actually be set aside from any of the matrimonial assets that are created during the relationship and protected. ⁓ And if you don’t have a binding financial agreement, those assets would be taken into account account as part of the property settlement. So an important part of a binding financial agreement is you’re effectively saying we don’t want the family court or the family law to actually deal with our assets when we separate. We’re ousting that jurisdiction and instead we are contracting to reach a separate agreement that is legally enforceable. To be legally enforceable it needs to be in writing, it needs to be signed. Both parties to the agreement need to be given independent legal advices to the advantages and disadvantages of the agreement and it’s important that that advice is independent so both parties to the relationship would need to see their own lawyers and have that agreement created to be enforceable in Australia.

Can I add one more thing about that? ⁓ It’s also, I think, important to know that you can actually come to a BFA whilst you’re in the relationship. I have ⁓ many people coming and see me, sometimes couples coming and seeing me to say, look, we are considering separation. Sometimes there’s been some financial betrayal in the relationship. So one party wants there to be an agreement as to what will happen if they separate in order to try again or to keep the relationship going. So you actually can come to one of those agreements ⁓ during the course of your relationship about what might happen if you do decide to separate. Which is why the term prenup is a bit misleading because in Australia binding financial agreement can be entered into before, during and after. So there’s several different stages in a relationship that you can enter into a binding financial agreement in Australia and I think that’s important for people to be aware of because things can happen during a relationship. For example, ⁓ one party to that relationship might be gifted money or receive an inheritance or be loaned money in fact and that could be covered in a binding financial agreement even during a relationship provided a course the requisite indicia for a binding financial agreement is ⁓ met.

Yeah that’s really interesting I didn’t actually know that you could do one during a relationship and I think that would make a lot of sense particularly to your point about, you know, wealth realisation events like inheritance or something that comes during the relationship. So that all sounds well and good and, you know, it’s peace of mind, sleep well at night from a legal perspective, but those conversations can be a little bit sensitive. As you say, it’s only for the two parties in a relationship, but also if we’re talking about from a parental perspective, you know, having your son or daughter-in-law, you know, agree to the binding financial agreement, I imagine can be really tricky. Jacqueline, you have, have you had experience with this? Do you have any advice?

Yeah, well it’s important of course to note upfront that money isn’t just about dollars and coins and it really represents, there’s a strong emotion underlying money. For many people it’s a source of power, others it’s a source of shame. There’s a sense of entitlement for others. So money is a hot issue and really when we look at when people separate, it’s often, we say it’s the conflict isn’t the number one reason why people separate, but really it’s about financial conflict. That’s the real reason why people separate, because they haven’t been able to have the money conversation. And let’s be honest, ⁓ in the old days it was money is to be seen, not heard. And I don’t think many of us are very well equipped to have that conversation. We understand that money is a private thing and not to be spoken about. It’s definitely something that I would recommend that people have. I mean, here we’re talking about two different types of conversations, parents with children and then the children who are entering into a relationship. So obviously parents need to teach their children how to talk about money around the dinner table and whatever else what money is, what people’s hopes and fears are about money. Is money a vehicle for what? So people’s values. I would always recommend the children speaking if you’re entering into a relationship to start the money conversation sooner rather than later. You don’t want to be four years into your relationship thinking about getting engaged and then think, I actually need to have that conversation now about the fact that I might be getting a big inheritance or mum and dad want to help us. Having the conversation early in your relationship will help you both sort of ⁓ manoeuvre through those difficult conversations more easily when those issues come up. In terms of tips, tips of the sorts of things that you would, how you could discuss money or pre-naps earlier ⁓ in your relationship, well if you’ve been having those money conversations it should be fairly easy. But obviously with pre-naps there’s a whole lot of people are frightened of prenups, there’s this whole stigma around them and so there’s that view that you don’t really love me, if you want to enter into a prenup you don’t trust me, ⁓ this is not romantic, I want to be swept away. Yeah, there’s definitely that sense, but on the other hand there’s some really good reasons as to even the person who doesn’t have the money should really think about, think that it’s a good thing, first of all to learn how to have the conversation, but also because it would be better for them to know before they enter into ⁓ a marriage or to have children with someone what their money values are and what their expectations are. It’s easier in some ways for their interest to be protected when they’re feeling loved or when they’re in a loving relationship rather than later when you know it might be a full throttle war and if it’s the other if the other person is wealthier then that person is likely to be able to really man up with the lawyers so there’s some really good reasons why it’s actually good for the less wealthy person to enter into an agreement and that’s probably a way that the conversation could start. If you’ve been having lots of money conversations and you understand what your money values are, then you might just say to the person that you know you’re thinking about entering into a de facto relationship with or getting married to, you know, I really love you, I’d rather have these conversations now. While things are good, be really upfront, let’s really talk about what might happen. This is like an insurance policy. I would hope that we have a really full and proper discussion. We enter into an agreement if that’s where we end up and then that agreement’s sort put in the bottom drawer. We never really have to look at it again. But when we both know where we stand, we both know where we feel and when we are entering into a marriage or a relationship openly and honestly, I actually think that there’s nothing more romantic than that. And I call it a financial seatbelt because you hope that you’ll never need it, but it’s there if you do. And we know what it’s like coming out the other end of a separation in terms of a sadly acrimonious separation where money and even more importantly, kids are involved. ⁓ And to avoid the cost and the emotional impact and ⁓ just the psychological trauma ⁓ that can flow from a contested ⁓ separation, I think that seatbelt is something that should be taken into account early and used. Even if you don’t enter into a binding financial agreement, having those conversations and actually everyone being really clear about what assets and debts they’re bringing to the relationship can actually help ⁓ in the event that anything goes wrong later on, can really help your family lawyer understand. What happened in the beginning because that actually is an important part of the family law system and the division of assets of what both parties brought in. So even just having that conversation, and I say that to my kids, you’re gonna need to know what you’re both bringing into the relationship. And be financially empowered, I sense would be, I think is really important.

So Skye, we mentioned before, you know, if parents want to provide support to their children in the way of, you know, providing assistance with purchasing their first house or investments or contributing to their superannuation. If this conversation, if, you know, any clients are listening and they think, gosh, I’ve already done that. And, you know, we haven’t necessarily thought about, you know, the asset protection or estate planning ramifications of that. You know, are there any options for those clients?

It’s a little bit more difficult, but I wouldn’t say necessarily that the ship has sailed. ⁓ So as we said before, binding financial agreements can be entered into at various stages of a relationship. So ⁓ if money has been gifted and both ⁓ the adult child and their spouse are agreeable at a point maybe two or three years down the track to enter into a binding financial agreement to take into account that gift, then that can be dealt with in a binding financial agreement. ⁓ It may be that the parents might want to gift further money and they might have a conversation with their child and the spouse and say we’re prepared to give this money but we really would like it all dealt with in some way through an agreement to protect that money maybe for our child or even our grandkids effectively ultimately. So it can be dealt with, it’s a little bit trickier but there are different ways that it can be dealt with. I think at this point I should draw a distinction between a gift and a loan, because they’re very different from our perspective ⁓ and they can be dealt with a little bit differently but I think it’s important to understand the difference. when money is gifted, ⁓ it’s not intended to be repaid. That’s the key difference between a loan and a gift. A loan, there’s an intention that it will be repaid and a gift, there isn’t that intention. ⁓ A loan is generally a contract that has terms, it’s a legal contract. A gift is not contractual so there’s no requirement for there to be an agreement for repayment of that money with a gift ⁓ and repayment as I said is expected for a loan not a gift. So we often see parents that have lent money to their kids to assist with the purchase of a property. ⁓ If that relationship breaks down ⁓ that’s when problems can ensue particularly if there is a real legitimate belief that that money is to be repaid and it’s dealt with quite differently ⁓ in family law so if a money is characterized as a loan then it’s actually repayable before there’s any division of assets so they will get dollar for dollar the money that they’ve lent back. If it’s a gift, it’s dealt with as part of the overall property settlement in terms of a contribution that’s made by one party or another and ⁓ they won’t actually receive, the people that lent the money won’t actually receive that repayment. It will be dealt with as part of the property settlement and it will be dealt with largely as a contribution made by the spouse that has ⁓ parents or whoever has gifted that money to them as a contribution on their side. ⁓ It’s tricky and gifts because often… I mean we were talking a bit about this before, how loans can sometimes really, parents say, well we want to loan you that money, but if you break up we want it back. So it’s sort of a conditional loan, but… Conditional gift actually. A conditional gift actually. But it’s tricky because the court will look at it quite legalistically. So in determining whether money advanced is a loan or a gift, they’ll look at it as a commercial loan agreement. So is there a contract is there money that is supposed to be repaid is there sort of arms length interest repayments Will they take enforcement proceedings if the repayments are in default? So it’s almost like if you want it to be considered a loan you have to actually have a proper loan agreement that you prepared to enforce That’s like effectively a bank loan in some cases We see parents might put a caveat on the property or have a mortgage on the property and they do actually take enforcement proceedings if there’s default, which creates some complexity in the family dynamics. But apart from a loan agreement, often is problematic because often they’re not enforced and generally the family court will say well it doesn’t really look like a loan so therefore it’s not a loan. And on the evidence doesn’t support it being considered a loan. The only way you could protect that really would be through a binding financial agreement where it’s in the agreement, it says that that money will be repaid at a certain point upon the relationship breaking down. Similarly, a gift can also be dealt with in a binding financial agreement as well. But I think from my experience as a lawyer and also working as an associate at the court for a long time, family loans aren’t often held up by the court. Particularly both parties don’t know about them too because we see that all the time that they say it’s alone and it was given to one, to their child. But the other person doesn’t know anything about it. They don’t know, they think it’s a gift. They don’t know how much it was and the other thing that we see a lot is lots of gifts of money and then all of a sudden, all of those, know, myriads of like 25,000 here, 100,000 there, whatever, apparently they are all alone and yeah, it’s a bit difficult. It’s difficult to enforce and it really comes down to the evidence that you are able to provide to the court to assert that it’s a loan and depending on the size of the money that sometimes involves the people that have given the money being joined as parties to the family law proceedings. So whilst I said before a binding financial agreement is between the husband and wife or the partners to a relationship, if there’s a dispute about a family loan and family law proceedings are on foot and there’s no binding financial agreement in place then sometimes the parents might actually be joined as separate parties to the litigation and that of course brings with it a whole lot of money, expense and stress. So really the best way to deal with loans and gifts from family members in our view and the safest way to avoid the cost emotionally and financially at the end is to consider a binding financial agreement as soon as possible.

Yeah, which I mean and they’re not easy conversations to have as we were talking about before. Certainly, I think asking if these things are coming up in the family it’s really important that everyone has those open conversations. If parents are putting too much pressure on the kids to enter into a prenup though and get Skye to talk to this, that can also be problematic. It’s also the timing of when they enter into the prenup ⁓ that can also be problematic. Maybe Skye could talk a little bit about that.

Yeah, so I said before that binding financial agreements are… need to be very carefully drafted documents and it’s relevant what Jacqueline says because if they’re not properly drafted and if the timing of the agreement’s done in a situation where one party to the agreement may be put under pressure or we call it a little bit of duress, ⁓ that can lead to that agreement potentially being set aside by a court. So it’s really important that if you are thinking of entering into a binding financial agreement, firstly that there’s no pressure exerted on anyone to enter into the agreement. So that’s when we have the open conversations. We try and have a lot of time to have those conversations. So for example, don’t start having the binding financial agreement conversation, you know, two hours before you’re to get married. That would be a very bad thing. ⁓ You want to have a lot of time to have that conversation. You want both people in the relationship to feel like they’re being heard. I you want both people in that relationship to be well represented. And sometimes we even see people actually going to having the assistance of a mediator helping draft these types of agreements and reach the terms in terms of what’s set out in the agreement. Just so everyone can be heard, everyone has a say. It’s all done very calmly and openly with a lot of transparency. Because if you’re not open and transparent and there’s a lot of pressure, those sorts of things can lead to the agreement being problematic in terms of being upheld because we do see applications brought to the court for binding financial agreements to be set aside. So it’s important that ⁓ it’s done properly, it’s technically prepared well and that everyone’s given an opportunity to be heard in relation to the agreement and given proper independent advice as to the advantages and disadvantages of having that agreement executed.

Yeah, I mean, I do quite a bit of that work as Sky knows, sitting down with couples, either couples ⁓ who are in a relationship and want to have ⁓ a during up, drawn up, or couples who are about to get married or enter into a de facto relationship. And the process that I would take them through is really ⁓ understanding what their fears are around ⁓ entering into a prenup, talking about how they see their future. So we have a lot of discussions about, you know, what if you have children, ⁓ what does that look like, does that change the nature of an agreement that you want to enter into, how will we be dealing with day-to-day money, how will we be dealing with intergeneration transfer of wealth. And often I’m working really hard with the person who’s going to say, the person who doesn’t have access to wealth in the same way to make sure that they’re really informed, get them some financial advice if they need to, but at least make sure that they are feeling strong enough to understand what money is and how to have those conversations. And I know Skye probably won’t like to hear this, but sometimes we have all of those conversations and then they decide, we write everything up, this is what they agree, this is how they want to deal with their day-to-day monies, this is how they want everything to happen ongoing in terms of their assets and debts and then they decide that they don’t want her into a prenup because they’ve had the money conversation and they’re going to continue to have it and they both feel confident so but I see that as a win because you know hopefully they’re both informed they’re able to have those very equal discussions and hopefully that means less conflict and they’re not going to be going down the path to divorce.

Good point actually, you know, we might just round this conversation out by sort of looking at, you know, right at the other end of things if, you know, unfortunately, you know, we know rates of divorce and separation are for one reason or another, you know, increasing. So with your experience as a divorce coach, Jacqueline, what would you, you know, if anybody knows somebody thinking about going into about separating or they themselves are considering it, what advice would you be giving?

Well, information is power, knowledge is power. the first thing, I always say the most important person you need in a divorce is a calm you and an organised you. You don’t need the best lawyer or a bulldog lawyer. What you need is a calm and organised you, which really means getting across your finances, understanding your assets, understanding your debt. Being really clear about what your expenses are, gathering as much information as you can when you feel able to. Obviously it’s a roller coaster. When you’re going through a divorce there are going to be periods of time where you feel really activated and energised and I’m going to be able to get through this. That’s when you do your work because there are going to be times where you’re going to sink. So yeah, getting prepared on the financial front is really, important. Something a lot of people avoid, unfortunately, because it is overwhelming. But the sooner you can get on top of that, the better you’re going to feel and the better the decisions you’re going to make. You also obviously need to look after your emotional health and not saying that and of course if there are children they also need to be front and centre of anything that you’re doing. But from a financial perspective absolutely start collating as much information as you can about what happened in the beginning, what happened during and where you might see your future lie. So do you want to keep the house? What do you need? What do you need? Yeah. And yeah, it’s a time where your emotions are a little bit all over the shop and that’s, know, particularly in the beginning there’s a lot of shock. So give yourself a little bit of a break too and allow yourself to heal. But yeah, get organised.

I think in my experience working with some clients that have gone through this as well, it’s very important to have your team around you, have your team of advisors, friends, people you trust and call on, and I think that’s, again, speaking to both of your expertise today, and thank you very much for being so generous with your time and insights, and I think that’s given some really practical steps and strategies for our clients today. So thank you both. Thank you. Thank you.